Office sector demand recovers

Office sector demand recovers

Office sector demand recovers

 Corporate occupiers are taking advantage of the fact that office rents have generally experienced downward correction for over a year in most markets, and some are availing themselves of this opportunity to upgrade their premises to Grade A facilities.

At the same time, Asia’s overall business sentiment was buoyed by the continued improvement in the regional economy. The labour market has also tightened, with the unemployment rate clearly tracking downwards in most markets and large-scale companies announcing recruitment plans.

Recovery of demand in the office sector was reflected by the growth in the net absorption level for the whole region, which was recorded as 31 per cent higher than the figure recorded in the last quarter, and most cities surveyed recorded positive absorption of office space.

Office rents in Asia
Landlords took a firmer stance towards rental levels as the market started to see stronger demand amidst the improvement in the economic environment. Overall office rents in Asia fell 0.1 per cent in the first quarter, representing a marked decline from the 1.9 per cent deceleration recorded in the previous quarter.

Cities in the Greater China region exited the downward rental cycle somewhat earlier than cities in the Asian region. Beijing, Shanghai, Guangzhou, Hong Kong and Taipei all recorded quarter-on-quarter growth in office rentals.

India’s leading commercial centres also saw further signs of office rentals bottoming out, with a number of prime office districts in the National Capital Region and Mumbai starting to record signs of rental recovery. 

Leasing remained buoyant
Leasing activity in the major Indian office markets remained buoyant in the first three months of 2010. The CBD of the National Capital Region reported an increased number of transactions in both Grade A and Grade B market segments. In Mumbai, there was a noticeable rise in enquiry levels and transactional activity.

The increase in demand brought CBD vacancy compressed to 12.9 per cent from 18.2 per cent recorded in the final quarter of 2009. The major business districts of Bangalore reported a slight increase in interest from occupiers and a marginal rise in leasing activity. The Extended Business District became the preferred destination for many occupiers due its lower asking rents.

Commenting on the report, Anshuman Magazine, Chairman & MD, CB Richard Ellis, South Asia Pvt. Ltd. said, “ During Q1, 2010, while most micro-markets continued to face a situation of oversupply, demand levels did see upward movement.

 The economy in India has seen improvement during these past few months and this in turn has brought some stability to the real estate sector.” 

 Demand for Grade A office space in Tokyo began to recover in the first quarter of 2010 as significant cuts in rentals encouraged tenants to take up Grade A space and some companies leveraged on the opportunity to upgrade their leased office accommodation.
The quarterly rate of decline of Grade A rents accelerated to 10.5 per cent in the first quarter of 2010 from the fall of 4.7 per cent quarter-on-quarter recorded in the fourth quarter of 2009, because a number of landlords of selected Grade A buildings suddenly reduced their asking rents after failing to secure tenants at the hoped for rental level.
Despite sluggish conditions in the overall market, signs of bottoming out of rents in top business submarkets such as Marunouchi and Otemachi have become clearer recently.  
Activity in the Seoul office market increased steadily in the first quarter of 2010 as the Korean economy continued to recover from the economic downturn.

Leasing activity was generally confined to Korean conglomerates consolidating their subsidiaries into self-owned properties or relocating their branch offices into single buildings in order to improve business efficiency and reduce operating costs. Rents for Grade A office space continued to trend upwards during the first quarter and the GBD reported its first rental increase in three quarters.

However, the first quarter is traditionally a time when most Korean office landlords adjust rents for the rest of the year. In a clear sign of improving economic conditions, this year the number of buildings conducting annual rental adjustment in the first quarter was significantly lower than in the corresponding period of 2009.  In China, vacancies were further compressed as more multinational companies expanded their premises.

 Although the quantum of new supply scheduled for completion in 2010 is relatively large, it is expected that the market will not come under heavy new consolidating pressure as underlying demand continues to recover.

In Beijing, although leasing activity was interrupted by the Chinese New Year holiday break in February, take-up remained brisk overall with net absorption totalling 1.5 million square feet. In Shanghai,  the first quarter witnessed the total quantum of net absorption exceed total new supply for the first time since the last quarter of 2007, a phenomenon which was attributable not only to the relatively low level of new supply, but also more importantly, the continuous recovery in market demand.
The Guangzhou prime office market exited the down cycle in the first quarter of 2010 as average rents rose by 1.5% quarter-on-quarter, the first increase recorded since Q3 2008.

The Taipei Grade A office market stabilised in the first quarter of 2010 as economic fundamentals improved and business sentiment strengthened. A number of multinational corporations, which had adopted a wait-and-see attitude last year in the aftermath of the global economic downturn, committed to new office space during the review period, whilst others were actively seeking relocation alternatives. Landlords generally kept quoted rents unchanged in the first quarter as economic fundamentals improved. 
Hong Kong saw a rise in leasing transactions and limited new supply which helped push the overall vacancy rate for Grade A offices down 110 basis points over the first quarter to average 7.4 per cent.

It has become increasingly difficult for larger occupiers looking for contiguous space even in decentralised areas. Demand for Grade A office space in Central was driven by the return of new hedge funds and private equity firms. The momentum of rental growth in Central gathered pace, rising by nine per cent during the quarter the highest rate of increase recorded in of all the main office districts.

The Singapore office market enjoyed an active first quarter as the strong leasing momentum witnessed in the second half of 2009 spilled over to get the current year off to a very active start.

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